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The world of futures

The world of futures trading has become increasingly dominated by short-term speculation. In the good old days, markets moved slowly and steadily toward their goals, or they continued in sideways trends for extended periods. This is not the case today. In fact, since the early 1970s, virtually all futures markets have become increasingly volatile, and the time window of market moves has steadily narrowed.

This is not to say that the old adage "the big money is made in the big pull" is no longer true. It's just as true today as it has always been. There will always be large, long-term market moves. What has changed, however, is that short-term volatility has become so significant as to necessitate the use of extremely large stop losses, thereby forcing traders to risk substantially larger amounts of capital than ever before. The big pull still provides outstanding opportunities, but it also entails larger risks than ever before.

Increased volatility is both a sinner and a saint. Although it has made trading with limited risk less possible, it has also brought with it a plethora of short-term trading opportunities. Significant profit potential now exists in virtually all markets. Prior to the aforementioned increase in volatility, the potential for profit from short-term and day trading did not exist other than for the floor trader. Now such opportunities are available to all traders. But with opportunity also comes riskтАФthey are both sides of the same coin. Without risk there cannot be rewardтАФwithВэout volatility there cannot be intraday opportunity.

The Forces Behind Increased Volatility

In addition to increased volatility, several fundamental factors have become powerful driving forces in the futures markets, forces which were not significant to any meaningful degree prior to the 1970s. Specifically, I refer to relatively low commissions and significant advances in personal computer technology.

Furthermore, the advent of negotiated brokerage commissions and disВэcount brokerage services has opened a vast new area of opportunity for all futures and futures options traders. It is now possible for traders who do not seek the advice, input, and "full service" of a broker to pay greatВэly reduced commissions, thereby allowing for more active trading as well as trading for smaller price moves. Commission cost is the single largest overhead factor in futures trading. Commission has always been, and will always be a severely limiting bottom-line factor for the futures trader. Unfortunately most traders fail to realize this vital fact. Combined with losses due to system limitations, trader error, and slippage, commisВэsion costs add up quickly. At the end of the year traders are often taken aback with what they have paid out in commissions and fees.

With greatly reduced commissions, however, the short-term and day trader can now trade more actively, more profitably, and more aggresВэsively. Discount commission costs must, therefore, be considered as one of the most important factors contributing to the growth of short-term and day trading since the 1980s.